You have been making mortgage payments most of your adult life. Maybe it’s time your mortgage lender starts to pay you back.
According to the National Reverse Mortgage Lenders Association, since 1990, 906,018 seniors have accessed the equity in their homes by taking out a reverse mortgage. Although recently, the numbers seem to be on a decline. In 2009, 114,292 applications were processed, while in 2014 only 51,642 seniors applied.
The reverse mortgage is a financial product that has been available for more than 50 years, but many people are confused about what it is and how it works.
The original idea of the reverse mortgage was to give seniors (age 62 and over) the opportunity to access the equity in their homes without selling or incurring the obligation to make monthly payments to a lender. It was expected that most reverse mortgage borrowers would receive monthly payments from the lender to help pay their living expenses and age in place. However, recent studies have exposed worrisome trends that can put borrowers at financial risk.
David Cutner, partner at Lamson & Cutner, P.C., attorneys for the elderly and disabled, offered the following insight about reverse mortgages for boomers:
Boomer: What is a reverse mortgage and how does it work?
Cutner: I think that a reverse mortgage might be best understood by comparing it to a conventional mortgage. With a conventional mortgage loan, you borrow money from a lender (usually a bank or mortgage company), and you pay back the loan in monthly installments over a lengthy period of time (typically 15 or 30 years). Your property is collateral for the loan, and the bank can foreclose on it if you fail to pay back your loan.
With a reverse mortgage, the bank or mortgage company is lending you money, but you don’t have to pay back the loan until the property is sold, you move out of your home, or you die. The home is collateral for the loan, and the loan is repaid when the home is sold. If the home is worth more than the mortgage (amount loaned plus interest), then the remaining equity will go to your estate. If the home is worth less, your estate is not liable for the debt and the lender must take the loss, although the lender may be able to obtain reimbursement from the Federal Housing Administration (“FHA”). Most reverse mortgages are government insured.
Generally, reverse mortgages are available to homeowners over the age of 62 years, provided the home is their primary residence. The home must be free of other mortgages or liens. There are usually no credit requirements for this type of loan, because you are not required to make any payments to the lender until the home is sold. However, homeowners must continue to pay the property taxes and insurance, and maintain the home.
Boomer: Are there risks that I should consider before planning to get a reverse mortgage?
Cutner: Yes. Many reverse mortgage borrowers are assuming risks that could have a devastating impact on them.
According to the Consumer Financial Protection Bureau, the most common age of a reverse mortgage borrower is 62 years, which is when individuals first become eligible for this product. These relatively young borrowers have a lot of years in front of them, and borrowing too soon – before the funds are really needed – can have a devastating impact later on. They may find themselves with little resources to meet the financial challenges they will face in later years, including paying taxes and insurance on their home.
Reverse mortgage borrowers usually pay higher costs, higher interest rates, and get a lower LTV (loan to value ratio) than under conventional mortgages. The amount you can borrow is limited by the value of your home, the interest rate, and your age. Also, accrued interest compounds over the years, increasing financing costs. As a result, borrowers may find that they have “maxed-out” their borrowing power from their home equity sooner than expected.
Another significant trend is that many borrowers take large lump sums from the reverse mortgage lender, rather than monthly payments. As a result, they incur higher upfront costs, and often do not have a sound plan for the future. Some borrowers invest these funds in savings accounts, securities, or other financial products. In many cases, interest on savings or investment returns are less than the interest accruing on the reverse mortgage. Of course, any investment losses exacerbate the problem.
Boomer: If I get a reverse mortgage, what are the costs involved and what are my obligations?
Cutner: The initial costs of a reverse mortgage are generally application fees, appraisal fees, lender fees, attorney’s fees, the initial mortgage insurance premium, and closing costs. Of course, interest charges and mortgage insurance premiums will accrue as long as the loan is outstanding. The homeowners’ obligations are to pay the taxes and insurance, and maintain the home.
Boomer: What if I don’t meet my obligations? What options do I have?
Cutner: Borrowers who do not meet their obligations may find their home in foreclosure. Lenders are not obligated to pay the taxes or the property (and flood) insurance on your home, and your failure to do so jeopardizes their collateral for the loan.
Boomer: What is the role of my reverse mortgage company/servicer?
Cutner: Your mortgage servicer is the company that manages the operational tasks related to your loan. It may or may not be the same company that made the loan. Some of its functions are important to you, and other functions are to comply with regulatory requirements or to report to the lender. Here are some examples:
• The servicer makes the payments to the borrower (your payments might be scheduled monthly, unscheduled under a line of credit, or a lump sum upon request);
• Handles requests to make changes in the payment plan; provides statements to the borrower and notices of any changes in the interest rate;
• Makes sure that you are paying your property taxes and insurance, and that the home remains your primary residence; acts as escrow agent for taxes and insurance; determines when your loan is due and payable, and initiates foreclosure proceedings when necessary;
• Reports to the lender or investor on the status of the loan.
Boomer: If my house is not paid off can I still get a reverse mortgage?
Cutner: Yes, but you will have to pay off any existing loans with the proceeds of the reverse mortgage.
Boomer: Do you have any final advice for boomers?
Cutner: Reverse mortgages are complicated financial products. Make sure you fully understand the terms of the mortgage offered to you, in particular how much money you can actually borrow, how much you will have to pay upfront to get the mortgage, how much interest and other charges will accrue over time, and how those accruing charges will limit or affect your ability to borrow money going forward. Remember that you remain responsible for taxes, insurance and maintenance of your home. Explore other options before committing to a reverse mortgage. Seek the advice of an attorney or financial advisor if you have any questions or reservations about what you are doing.